Palantir Technologies (PLTR 3.73%) can make for a polarizing stock. While there are plenty of bullish investors who love the company's artificial intelligence focus, mix of commercial and corporate clients, and its no-nonsense CEO Alex Karp, there are others who believe it's overrated.
Since 2021, an increasing number of investors were shorting Palantir stock, but that trend has abated with the stock's 200% rise in the past 12 months. Have the short sellers given up on betting against Palantir? One chart seems to suggest that's the case.
Short interest in Palantir stock has been on the decline
One of the reasons Palantir stock has been able to generate such impressive gains over the past year is that short interest in the stock has been declining. Short interest represents the number of shares sold short by investors, many of whom are betting against the company because they expect its stock to decline.
The act of short selling requries someone to borrow a stock, which they then sell at the market price. Assuming the stock does indeed fall, the investor can then buy it back later at the new lower price to close their position, pocketing the difference as profit.
When short interest is high, many shares are being sold, and that puts downward pressure on a stock. But currently, the short interest in Palantir stock as a percentage of float (the shares available for trading) is just 5%, down considerably from where it was just a few months ago.
Data by YCharts.
Proving the short sellers wrong
A big part of the reason for the declining short interest is the company's strong results. Palantir is no longer an unprofitable company. When it reported fourth-quarter and full-year 2023 earnings in February, it posted a GAAP profit for the fifth consecutive quarter. And it may only be a matter of time before it gets added to the S&P 500, further cementing its status as a top company.
Palantir helps its clients analyze data to make smarter decisions, and the company launched its Artificial Intelligence Platform (AIP) last year to tap into the growing demand for AI solutions. Through the use of "bootcamps," Palantir helps organizations identify use cases for AI to enhance their operations, unlocking value for clients on its platform in just a few days.
The surge in AI-related demand has opened up new growth opportunities for the business. In 2023, revenue grew 17% to $2.23 billion, and this year, management expects its top line to accelerate with 19% growth to $2.66 billion (at the midpoint of guidance). Meanwhile, the company also expects to post operating and net profits in each quarter of the year.
With this much momentum, many short sellers have thrown in the towel to stem additional losses.
Is Palantir Technologies stock a buy?
Palantir is generating solid growth and could be a top AI stock to own for the long haul. But what keeps me from buying the stock right now is its high valuation. Itrades at 73 times forward earnings estimates, a steep premium to the broad market.
That said, if you're in it for the long haul, there's plenty of reasons to be bullish that the company can expand its commercial business, continue to grow the bottom line, and generate strong returns for patient investors.
